By Luke Woodward, Gina Cass-Gottlieb, Genevieve Rahman and Petria Lewis
The Australian Competition Tribunal has granted Sea Swift Pty Ltd (Sea Swift) authorisation to acquire certain assets of the Northern Territory and far north Queensland marine freight business of Toll Marine Logistics Australia (Toll Marine) (a division of Toll Holdings Limited).
On 9 July 2015, at the conclusion of its assessment of Sea Swift’s informal clearance application, the ACCC announced that it was opposing Sea Swift’s proposed acquisition due to competition concerns. Sea Swift subsequently sought to secure approval for the acquisition by applying to the Tribunal for merger authorisation. On Friday 1 July 2016, the Tribunal issued its determination granting Sea Swift authorisation subject to conditions. The Tribunal assesses authorisations pursuant to the “net public benefits” test set out under s 95AT of the Competition and Consumer Act 2010 (Cth) (CCA). The Tribunal is yet to publish its reasons.
This is the second Tribunal determination of an application for merger authorisation since the process for direct application to the Tribunal was introduced in 2007. The first was the Tribunal decision, in June 2014, to grant AGL Energy Limited authorisation to acquire Macquarie Generation.
In hearing and granting Sea Swift’s application within the three month statutory period, the Tribunal decision reinforces that merger authorisation can be an effective route by which to secure competition clearance for acquisitions involving public benefits.
Gilbert + Tobin acted on behalf of Sea Swift.
Sea Swift and Toll Marine provide marine freight services to coastal and island communities in Far North Queensland (FNQ) and the Northern Territory (NT), shipping cargo to customers in remote locations with limited or no road access. Freight services are generally provided to these remote communities by way of a “scheduled service”, where cargo is freighted to communities according to a frequent and regular schedule.
Importantly, customers living in these remote communities rely on regular and reliable scheduled services for their essential living requirements, including the delivery of food, medical supplies, fuel, building materials and educational supplies. In order to service customer demands, operators require the capability to offer regular weekly freight services to a majority of communities in the particular region. For the purposes of the proceeding, operators that are able to provide that service offering were referred to as “full service operators”. At present, while there a number of sea freight operators in the region, only Sea Swift and Toll operate a full service operation in either FNQ or the NT.
In December 2014 Sea Swift applied to the ACCC for informal merger clearance to acquire part of Toll Marine’s FNQ and NT marine freight operations. On 9 July 2015 the ACCC announced that it would oppose the proposed acquisition on the basis that it would be “likely to substantially lessen competition”. The ACCC’s view was that the merger would eliminate competition between the parties and increase the barriers to entry for other freight providers in FNQ.1
On 21 September 2015, Sea Swift filed an application under s 95AU of the CCA seeking merger authorisation from the Australian Competition Tribunal. Sea Swift later withdrew that application for reasons unrelated to the proposed acquisition itself and, on 4 April 2016, filed a new application seeking authorisation.
In support of Sea Swift’s application, Toll Marine sought and was granted leave to intervene in the proceeding. In addition, the Maritime Union of Australia was granted leave to intervene on a limited basis (on the topic of the employment or prospective employment of its members).
Sea Swift’s application was supported by witness statements filed by Sea Swift and Toll Marine from various market participants including competitor, customer and community representatives based in various remote locations across northern Australia. Sea Swift’s application was also supported by expert economic evidence. The ACCC provided a report to the Tribunal, in addition to lay and expert evidence, in accordance with the statutory process outlined under the CCA for merger authorisation processes. In total, more than 40 witness statements were filed in the proceedings.
The matter was heard across two weeks from 6 June to 17 June 2016.
The Tribunal’s determination to grant authorisation is subject to certain conditions offered by Sea Swift in support of its application. Those conditions include commitments to maintain current scheduled prices and service schedules to remote communities, as well as to provide an enhanced access undertaking in relation to the landing facilities at the Gove Wharf, over which Sea Swift will acquire a lease as part of the acquisition.
The Tribunal process
The CCA provides for parties to apply to the Tribunal for merger authorisation. The Tribunal process is an alternative to seeking informal merger clearance where a merger may otherwise give rise to competition issues under s 50 of the CCA (which prohibits a merger likely to result in a substantial lessening of competition).
The Tribunal may grant authorisation if it is satisfied in all circumstances that the proposed acquisition would or be likely to result in public benefits (the “net public benefits” test).2 In assessing the net public benefit, the Tribunal considers the world both “with and without” the proposed acquisition.
A grant of authorisation operates as an effective statutory exemption from the application of s 50.
Under the CCA the Tribunal is required to hear and determine the application within a three month time period from the date the application is filed. The information submitted to the Tribunal, whilst not subject to the normal rules of evidence, is subject to a full hearing before the Tribunal, including a rigorous testing of the evidence through oral cross-examination of witnesses.
The parties' submissions to the Tribunal
Although the Tribunal is yet to hand down formal written reasons for its determination, given the authorisation process is a public process, it is possible to summarise the submissions of the parties before the Tribunal from the publicly available material. A summary of these submissions is set out below.
Importantly, there was evidence before the Tribunal that irrespective of whether the proposed acquisition was authorised, Toll Marine would exit the FNQ and NT markets.
Sea Swift submitted that given Toll Marine would exit the market in any event, there would be little difference between the competitive environment with and without the transaction. Sea Swift argued that the relevant markets are characterised by low barriers to entry, and relied on direct evidence from a range of other freight operators who already provide a scheduled service, or who have the capability to provide a scheduled service should they wish to contest the relevant contracts.
It was submitted by Sea Swift that the contestability of the markets was also supported by the history of entry and exit by various freight operators in the market over time. Sea Swift submitted that this history of entry and exit supported the fact that whilst the markets are, and will continue to be, contestable post-acquisition, given the high fixed costs of running a regular scheduled marine freight service and the relatively low demand for those services, the markets can only economically sustain one full service market operator.
Sea Swift submitted that the proposed acquisition did not give rise to any increase to barriers to entry, that potential entrants and the countervailing power from customers operated to constrain a single full service operator and, given Toll Marine was going to exit the market in any event, the proposed acquisition would not result in any competitive detriment.
The ACCC submitted that even given the fact that Toll Marine will exit the relevant markets, the proposed acquisition would substantially lessen competition because its exit by way of a break up of its assets, absent the acquisition, would provide operators other than Sea Swift with a “unique opportunity” to acquire Toll’s vessels and customer contracts, which it said would not otherwise exist if the acquisition proceeded. The ACCC submitted that should the proposed acquisition proceed, this “unique opportunity” would not be available to other operators and would result in a less competitive outcome.
The ACCC submitted that there were existing high barriers to entry in the NT and FNQ markets which would be increased as a result of the proposed acquisition. The ACCC stated that these barriers included:
- securing sufficient regular revenue through large customer contracts over a sufficient period;
- the reputation of the incumbent as a reliable provider;
- the reputation of the incumbent for strategic conduct;
- sunk costs of entry associated with establishing a reputation for providing a reliable service and sourcing suitable vessels; and
- access to landing facilities, in particular access to the port facilities at Gove.
Sea Swift submitted that the proposed acquisition gave rise to various benefits including:
- Toll Marine’s current customers achieve an orderly handover to an existing service provider;
- the efficient operation of the market is enhanced by allowing Toll Marine to exit a failing business in a way that minimises its costs of exit in the manner chosen by informed market participants, and by allowing Sea Swift to achieve an efficient volume of operations so as to be able to continue to meet the needs of coastal and island communities; and
- the price and service commitments which Sea Swift was willing to offer as part of the conditions of authorisation. Sea Swift submitted that those price and service commitments provide certainty to customers about the price and continuity of services to remote communities that would not exist if Toll Marine exited by way of break up, rather than via the acquisition.
By contrast, the ACCC submitted that the proposed acquisition provided minimal or no public benefit and that the commitments offered by Sea Swift would not resolve the competition concerns held by the ACCC and would not offer meaningful protection to coastal and island communities.
As outlined above, the Tribunal has handed down its determination and granted authorisation to Sea Swift but is yet to publish its reasons.
In a media release issued shortly after the decision was handed down, the ACCC stated that it was "disappointed that the Tribunal has authorised the acquisition, as the ACCC remains of the view that the acquisition is likely to have significant implications for future competition in scheduled marine freight services in the Northern Territory and far north Queensland, ultimately to the detriment of the communities reliant on these services." The ACCC further stated that it “will continue to oppose acquisitions which it considers are likely to substantially lessen competition.”
The ACCC expressed its view that:
The Tribunal’s decision in this matter is unlikely to apply to many other transactions, as the matter involved the unique circumstance that the scheduled marine freight services in question are essential services for the remote communities that they service.
This is the second Tribunal determination of an application for merger authorisation since the process was introduced in 2007. By deciding Sea Swift’s application within the three month statutory period, the Tribunal reinforced that merger authorisation can be an effective route by which to secure competition clearance.
We await the Tribunal’s formal reasons and will provide further analysis once they are published.
In the meantime, Sea Swift’s application and other materials that were before the Tribunal can be accessed via the Tribunal’s website by following this link: http://www.competitiontribunal.gov.au/authorisations#list
1ACCC Media Release, ‘Q and A: Sea Swift proposed acquisition of Toll Marine’, 10 July 2015, available at:https://www.accc.gov.au/update/q-and-a-sea-swift-proposed-acquisition-of-toll-marine; ACCC Media Release, ‘ACCC opposes Sea Swift Pty Ltd’s proposed acquisition of Toll Marine Logistics’ 9 July 2015, available at: http://accc.gov.au/media-release/accc-opposes-sea-swift-pty-ltd%E2%80%99s-proposed-acquisition-of-toll-marine-logistics.
2CCA, section 95AT(1).